Budget 2011: lending squeeze casts shadow over pro-business Budget

Budget measures to boost investment and reward entrepreneurs who build successful businesses from scratch are in danger of being undermined by a shortage of credit, top business-transfer agents have warned.

In Wednesday's Budget George Osborne doubled the lifetime limit for entrepreneur's relief, so that business owners will now pay just 10% capital gains tax, instead of the higher threshold of 28%, up to a lifetime limit of £10m.

The new threshold, which comes into force from 6 April, will represent a 1,000% rise in just a year, with the limit having already risen from £1m to £5m since last year's Budget.

Quizzed by BusinessesForSale.com, the world's largest directory of business opportunities, professional intermediaries broadly welcomed a move that will help risk-taking serial entrepreneurs. However, some have warned that the impact of the raft of pro-business measures announced by the Chancellor will be blunted by a continuing dearth of credit.

Shaun Sweeney, managing director and founder of business transfer agency Turner Butler, believes the change in entrepreneurs' relief will encourage entrepreneurs to invest capital recouped from business sales into new enterprises:

Now business owners will be encouraged to continuously build and grow businesses to create employment and wealth

Shaun Sweeney, Turner Butler

"We've had a number of years where the small business owner has been forgotten about, with the odd scrap thrown to them.

"Historically, entrepreneurs sell their business between three and seven years into the enterprise and the successful ones get out with a large amount of money. In the past they could roll their capital gains over as long as it was being pumped back into another business.

"The last government did away with that, bringing in a relief system. If an entrepreneur generated £2m on a sale they would pay £1m on it. So if a client sold a business for £5m the temptation was to protect his capital rather than invest it in another business, because any growth was taxable.

Create wealth

"The government has recognised that the skills required to create a business from scratch are different to those needed to manage an existing business. Now business owners will be encouraged to continuously build and grow businesses to create employment and wealth for the community."

However, the measures, which also include a £500 increase in the annual exemption from CGT to £10,600, an increase in income-tax relief on investing under the Enterprise Investment Scheme (EIS) from 20% to 30% and a easing of restrictions on Venture Capital Trusts, will have a minimal impact on entrepreneurial activity so long as banks remain intensely risk averse, according to many agents who find buyers for businesses on the market.

Rod Burney of Preferred Commercial says the budget is a "smokescreen" that masks the fundamental problem stifling entrepreneurial activity: a lack of bank funding. "Until more finance becomes readily available the budget isn't actually going to make a massive amount of difference," he says.

"People are finding it very difficult to get finance. They're looking at businesses in a bracket they think they can afford but they're often finding that they can't, so we're introducing them to a lower price tier.

"And it's very much a leasehold market at the moment. The budget was a smokescreen really."

Dean Edwards, director of Dean Edwards & Co, doubts whether the Chancellor has the levers to make good his pledge to boost bank lending.

"The reality is, there is still next to no finance available for small businesses unless it's an absolute corker with years of accounts," he says. "What they lent to three years ago without hesitation now fails at the application stage.

"It isn't anything like the same market. We've just sold a business for in excess of £800,000 freehold with a 7% loan to value - the first one like that for 2.5 years.

"What we've been getting instead is buyers who don't use the banks, who use money from 'under the bed' or get financial support from family. They're cash purchasers and they've kept our business going in recent years."

By depressing prices the lack of credit is something of a boon to cash buyers. Says Rod Burney: "The credit is there but surveyors are very cautious. They're down-valuing like you wouldn't believe. Freehold commercial properties have reduced by about 45% in the last two years.

"What we are finding is parents are giving money to their 'kids' - who are often in their 40s - because there is very little interest on savings so they are more willing to invest in turnover."

Such cash buyers are helping to keep the business-for-sale marketplace busy and a surge in the amount of redundancy money used to buy businesses is helping to offset the continuing scarcity of credit.

Says Rod Burney: "Last month we sold 31 businesses and we've agreed 26 sales so far this month, so activity is strong. The amount of enquiries we're getting from emails with .gov after them is phenomenal, suggesting there are many buyers armed with redundancy payoffs."

Although he generally applauds George Osborne's first full budget, Shaun Sweeney laments a missed opportunity to make the pensions cap, set at £50,000 annually, fairer to entrepreneurs.

"Business owners should have a lifetime limit, or at least a five-year limit, on tax-free pension payments rather than an annual limit. "It's fine if you're employed and pay 20% every year, but a business owner often can't afford to pay into a pension in the early years of a business, so in the lean years he loses out on a tax-free allowance."

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